Why Wall Street Still Believes The Bull Market Has Room To Run

Well, good afternoon. I'm Kenny Polcari and this is traded talking Yahoo finance. And today I've got two very special guests. We've got Gina Martin Adams. Who's the chief market strategist at HB wealth here in New York city. And Adam Shapiro, who is the managing editor of a invest a very interesting concept. We're going to talk about that. I'll let Adam tell you a little bit about that so that you get it, but it's going to be a very interesting conversation today. Well, thank you very much for joining me. I do appreciate it. I'm very excited to learn a little bit more about the, a invest. So, and the, as the listeners are as well. So why don't you tell us a little bit, Adam, just about a invest, and then we'll take it from there. A invest, think of it as two things. And it's very much like Yahoo finance. I manage the content side where we write articles. I have human beings who are writing articles for retail investors, for day traders. In fact, our demo, I can, I can share this. Our demo is, is, is mostly men 25 to 54. We do have women, but it's mostly men. And so we use the content that we write, both human video podcast and written articles, uh, as well as large language model, written articles as top of funnel to attract people to the platform. And then you can choose to try some of our, uh, AI tools. Amy is our agent. Our AI agent is Amy and Amy can, uh, you could use magic signal. You put in 10 stocks, you choose, and then you set the parameters you want to watch. And you tell Amy, this is what I want you to watch for sell, to buy all of these different things. And you will get notifications from magic signal from Amy. And then you then have to execute. And through the platform, you can link your, to your brokerage. Uh, and you can then execute trades. Should you choose? Well, let me just question. And then we'll get, Gina, we'll get to you in a second, because I'm curious when you say link my port link, my, my account will, will Amy do it automatically? Do I have to actually do the trade? You have to do the trade. However, right. Our engineers are creating what we call Amy claw and it's not ready for prime time just yet. But Amy claw, like the, like open claw and Nemo claw, if you choose to bring this into your computer ecosystem, it can execute with your approval. But I, as I said to, and I'm the old guy on the team, these are all 20 year olds with PhDs. Um, I think it's going to be difficult to convince my generation to do that, to do that, but I think I know that there are a hundred percent. I spent the weekend out in Vegas and there was a, there was a young man with us out there who was talking about how he set up his account, what's that? Nancy Pelosi account that it's, I forget what the name of it is. Anyway, he said to me, he signed up for that Nancy Pelosi account. And every time she makes a trade, this model will automatically make the trade. So you have to link your portfolio to the, to this, to this platform and you give a permission. You say, I have $20,000. That's what you have access to. And every time something happens, that system will automatically make the trade. I don't have to, he doesn't have to do it. He just lets it happen. So, so it's not rocket science. We, we have a tool, we follow everyone in Congress and we, we scan SEC filings, all of it. And so that's what the beauty of AI is. It's a tool that then tells you, Hey, this Congress person just did this. And then on this committee, you want to go there? I hear you. Which again, brings up the whole argument about why they're even allowed to trade. We could have a whole segment on whether or not they should be allowed to. I don't think they should clearly. I think a lot, most of the country thinks that they probably shouldn't. They should have, you know, they should, all their money should go into a blind trust as far as I'm concerned, the minute they get elected, they shouldn't have access, but we could, we could talk about that till we're blue in the face. Anyway, so Gina, let's talk about your role now at HB and HB wealth, because you prior to joining HB wealth, you were Bloomberg intelligence. And then prior to that, you were at Wells Fargo. So you have a history of the financial markets. And so tell us a little bit about HB wealth and your role there. Yeah, sure. HB wealth is a fiduciary fee only RIA headquartered in Atlanta, actually, but with clients all over the country, predominantly in the Southeastern and mid Atlantic United States. I'm the chief market strategist work inside the investments team, also sit on the investments committee. So we provide our research and analysis of financial markets to help enable investment decision-making help tool, the advisors with conversation, talking points and intelligence to share with our clients. Perfect. I love that. Cause you and I do the same thing. I do it as an independent RA as well, smaller than yours, but we design and do the same thing. I sit on the investment committee. I do all that stuff. I, I, you know, and I'm out in the media as you are. Uh, kind of talking about markets. So now that we're talking about markets, let's talk about it. We just had burning season is about over. We've got, you know, four or five companies that are going to report this week, which really will wrap it up. It's Marvell. It's, uh, uh, Hewlett Packard, Costco, uh, Dell and, uh, and Salesforce. I think, and I think they're very significant because those five, those five names kind of represent the whole theme that we're talking about. It's AI, it's infrastructure, AI infrastructure data. So talk to us a little bit about where you both stand on how the earning seasons played out, where you think we're over, where you think we're overdone and where you think the opportunity is. Okay. Sure. So earning season was phenomenal. Phenomenal. I mean, it was for lack of a better word, a 29% year over year versus expectations of 12%. Just phenomenal. 83, I think percent of companies beat expectations. So the backward look from earning season was extraordinary. I think the trouble we face now is how do we compare to that going forward? And typically years in which earnings growth peaks tend to ultimately be actually relatively low price return years because earnings growth is peaking. You can't get much better than that. This is the challenge for companies going forward. That said, there still are pockets of sort of extreme earnings growth that are inside the equity market. And now it's just a matter of how much are we paying for that earnings growth and can companies continue to beat expectations at such an extraordinary pace? So we're in this kind of a waffly middle ground with respect to the markets where, yeah, things look fantastic. Will they continue to get better? Or will we see momentum slow a little bit in the second half of the year as we start to see the impact of higher oil prices, higher interest rates filter through to some company fundamentals. So it probably becomes a little bit more of a mixed story into the second half of this year, whereas first quarter was unabashedly fantastic growth throughout. Right. Index. The oil story may in fact change, right? If we, if we get this deal that we're hoping is real, uh, this geopolitical deal, we may see oil come back down. It may not come back down to 60 initially, right? Because I think there's been a lot of disruption as a result, right? All those tankers sitting in the Gulf and all that stuff, but, uh, it may take some of the pressure off that. So that's going to be an interesting part of the argument in the second half of the year. It'll be really interesting, especially because there's a little bit of a misunderstanding about how oil impacts earnings. Oil and earnings are positively correlated. So usually you don't see the downside impact of an escalation in oil prices until oil prices start to ease, right? So you could have the sentiment headwind of high oil prices removed from the market at the same time that you have the earnings headwinds start to emerge. On oil that creates a more volatile outlook in the very short term, just depending upon when we do ultimately see oil prices resolved, frankly, stable oil prices are the best environment for equity. Yeah, but not at a hundred dollars. Not at a hundred dollars. And so if we can get back to 80, even lower than 80 and we can stabilize, then that's a fantastic environment. But for now it is still a risk and it's a somewhat underappreciated risk because it's been overwhelmed by extraordinary earnings in the short run. So Adam, tell us what Amy says. Um, well, I haven't asked Amy about this. Well, I will tell you what the guests we've had on our platform, and I'm not going to argue with an economist and someone who actually has skin in the game as a portfolio manager, not portfolio manager, but as a strategist. Um, one thing that people don't talk about is the fact we're in a midterm election year and that the second quarter of a midterm election is always the most volatile and you can expect things to, you know, I don't want to say panic, and then we shoot up after the election. So, and I've had different guests on our platform who've said that very thing. The one thing when you talk about earnings and where we're going is the question I like to ask the team when we're having discussions is how are we going to make money now? And you have juggernauts like Nvidia. Okay. They're going to make money. But then Salesforce, when they report earnings after the bell, you know, are they able to monetize what they've been doing? Agent wars. Right. Can they make money off of this? And that's the question we have, uh, anthropic is going to become profitable this quarter, right? Right. Uh, so we'll get an IPO. Great. Right. But open AI, what's going to happen there? And the question is that our investors are asking is where do I make money? Cause the herd is following the mag seven and the mag seven might have some difficulty. Google doesn't even tell you exactly what they're up to. Right. So you have to look where the herd is not looking. Right. Agreed. And so where's the herd not looking? Does Amy have an idea? Oh yeah. Well, Amy has an idea. Absolutely. You could go on there and you could ask Amy phrase the question very simply. Right. Everybody is chasing the mag seven with artificial intelligence. Where should I look if I don't want to follow the herd and see how Amy responds? I would bet you that Amy says, look at, uh, infrastructure build out at, uh, utilities, uh, at, uh, uh, Dr. Copper has got to be, uh, in, in demand. I have not asked Amy about copper right now, but with the infrastructure build out with AI and with data centers, the only thing that could throw a wrench into this is the NIMBY factor because there's this pushback now to building. There's a big pushback. As a matter of fact, they had a piece on it. Uh, I think Fox business had on yesterday about, about the big pushback. There's a, there's a development going on out and I think it's out in Oregon and the town is pushing back on it because they don't want it at all. Uh, so that's going to be interesting, but I'm curious where you think the opportunity is away from, because all that kind of circles around tech, right? It's utilities, it's the infrastructure bill, it's the data center, it's all around tech and AI. Let's step back for a minute and look at what other sectors though are presenting opportunities. I think there's opportunity in healthcare. I think there's opportunity in financials. I think there's opportunity in basic materials, right? I think healthcare is way underperforming. And so I think if you're looking to add new money as a long-term investor, not a day trader, right? Because, because, because I think your markets are different, right? We're both long-term investors and you're talking to a market of day traders. So you naturally want to be in that space, but you know, you and I, as you're building portfolios are talking to long-term investors that are building generational wealth, they're going to want to look at some of the sectors that are underperforming at the moment, not chase the names that are exciting for you, but may be too richly valued for us. Right. And I think when we think about the landscape, we think in terms of geographies, sectors, and factors. And really where we're seeing opportunities right now are in geographies and factors, even more so than in sectors. And I'll walk you through why. If you look at how the markets progressed over the course of the sort of ceasefire era, right? That major low that we had at the end of March, difficult to characterize, but we hit a major low at the end of March. We bounced back extraordinarily over that subsequent two month-ish period. Almost that entire bounce back was growth stocks. It was very specifically growth companies, most profoundly semiconductors were the biggest driver of optimism, right? So you had a 50% rally in semiconductors, which drove 40% of the S&P 500 rally over that time. Growth stocks got extremely overbought. That leaves all other components of the market somewhat undervalued and underappreciated, in particular quality stocks. So we look at quality very seriously, quality and value both as components of a portfolio. Quality stocks historically have just hammered growth over the long-term. They perform a lot better on downside as downside risks emerge. So define quality, are you talking value? We're talking high ROE, high ROIC companies specifically. Value, I would say, are really based on the valuation metrics. So low price to sales, low price to book, low price to earnings companies are also relatively cheap and did not participate in the rally. Value does not have nearly the historical track record that quality does. So we want to pick our spots relatively carefully there. But quality, frankly, it has growth-like characteristics, but also performs much better over the longer term and did not really participate in that rally. That leaves some opportunities on the table. Also from a geographic perspective, emerging markets have doubled the performance of U.S. markets this year. They also command a valuation ratio of only 12 times forward earnings, whereas U.S. stocks are trading at 21 times forward earnings on a market cap weighted basis. So there's a tremendous opportunity still there to diversify portfolios geographically and still participate in the upside, presuming that we're still in this longer term bull market with some give and take in the near term. Which I think we are. I mean, tell me where you think we are in this bull market. Do you think it's got legs to run? I think the economy is very strong. I mean, so I'll tell you who I follow just because I consider myself a Luddite. Torsten Slock over at Apollo. I listen to Torsten and not because they own Yahoo. I've known him for years. And he just put out a note the other day, Daily Spark, you can get it for free, that the economy is much stronger than people suspect. So when I hear the concerns about the inflationary pressures from, for instance, oil, I get it. But we haven't for some reason, we haven't broken that for an extended period. The $100 a barrel today, we're trading around 92 bucks a barrel. But the other thing, the other person I follow is not very well known. But this guy, Mike Dixon over at Horizon. And he's been talking about the S&P 600. He's talking about small caps and how we talk about S&P 500 is up. I think it's I sent some notes over to you. But 52 weeks, it's up maybe 27 percent, whereas the small caps are up 29 percent. My question, and you would know better than I would. Have we missed that rally? Because I think a lot of people were asleep when this was happening. Yeah, well, I think people have been talking about the smids, small mid caps for a while coming into this year. That was a sector that a lot of people were starting to focus on based on what they thought the economy was going to do, what they thought rates were going to do. That's a whole other conversation, because that because the rate conversation changed from, you know, two and three cuts at the beginning of the year to potentially a rate hike. Yeah, not even not even holding steady, but a rate hike, which I'm not so sure is really on the table anymore. But I think they had to put it out there to kind of take the rate cut story off the table for a little bit, because I think people are getting too excited about more rate cuts coming. And I don't think Kevin Walsh can really justify at the moment a cut rates. Now, I think it's going to be really difficult, in particular with the two year treasury yield now above the Fed funds rate. It's very rare, at least in the last 25 years. Yeah. For the Fed to cut rates when the two year treasury yield is already above the funds rate. They tend to follow the bond market. So we'll see where he goes with that. But I would say that is a predominant risk to small caps. Small caps are extremely interest rate sensitive. Now, so just to clarify, the two year is trading, I think, at 4.05 today. I think your guess is as good. No, I was wondering when I was writing, but I think that's about right. Yeah, right. But the Fed funds rate is three and a half, three seventy five. Yeah. So that's what you mean. That's what she means by the two year being. I just want to make that clear to the audience. Now, that's two years ahead of the Fed funds rate. Right. Which is a signal saying that rates aren't going lower at the moment. No, it doesn't seem likely. That said, you're absolutely right. We did have, at least in the first quarter and into April, a tremendous recovery in the manufacturing sector by the economy. And that played out as an improvement for small cap stocks, which small caps are also very sensitive to sick activity inside the U.S. And when the manufacturing sector suddenly recovered after, frankly, three years of sitting in dormancy. Right. It was a massive boon for small caps. If we can continue to see that momentum and potentially fade a rate cut, then small caps can do well. But that is a bit more mixed. But your point, that was exactly the story coming into this year. Tech had gotten stretched. Everyone was worried about tech coming into January. Remember, it was having a tough time. It was kind of repricing itself. But small caps and smids, right, small mid cap, as we call them, were starting to benefit. They've had actually so far a very good year. Right. Right. Now, if we don't see or if we if we start talking more about rate hikes, you may see the small mid caps back off a little bit as a result. I know, again, I'd say, what does Amy think? Well, I would ask Amy and I play. I play with a lot. We should have Amy here the next time we do this. Hey, Amy, what do you think? We could ask Amy and she would give it. Amy would give you an answer. But the question I would ask Amy is, can Warsh and the Fed manipulate the Treasury's the yields without a rate manipulation, but through the balance sheet reduction? And how will that play out? And then what would that mean? Well, that also is very meaningful because the balance sheet has been expanding. That's right. And that has been part of the hidden sort of resources behind the small cap rally. So even a balance sheet contraction, if rates stay steady, would not be great, likely for small caps unless you've got an even greater manufacturing recovery emerging. Now, all of this assumes something really interesting, I think, that we haven't talked about yet. And that is the mixed inside. The economy is very different today than it was, say, 10, 15, 20 years ago. Very different, frankly, than it has been at any point in U.S. history since the late 1990s. And that is, it's all business investment and manufacturing. It is not a strong economy in the way that we and our mothers and grandparents thought a strong economy would look, in that it's not driven by consumption. It's driven by sort of a flatline consumption with a major hockey stick acceleration in industrial production and manufacturing specific to tech industries. And that's playing out in the markets really profoundly. If that changes, if you see the consumer start to recover a little bit, if you see manufacturing industries outside of technology start to actually participate to a greater degree, that can also create a big tailwind for small caps and non sort of narrow AI focused tech industries and an adjacent industries that are supporting that build right now. Right. But let's think about just your point. If if Kevin Walsh shrinks the balance sheet, yep, then he and he himself has said it. If he shrinks the balance sheet, then he can cut rates because one really offsets the other. Right. He thinks so. Well, OK. And that's that's the argument. That's right. He thinks so. Listen, Trump for sure is going to put pressure because he's already said it, that he's rates are coming down quick. I just don't see it. I don't see how Kevin Walsh is going to convince anybody. Look, there's already dissent on the committee. There's four people that are already said, well, Stevie, Stevie Myron wants lower rates anyway. But the other three have already said back off. Not so quick. And I think that's going to be the difficult part for him. Yeah, it'll be really interesting to see how this plays out, because and it is somewhat dependent upon near term inflation conditions. I think the mistake that the consensus right now is making is saying near term inflation conditions are all related to the war in Iraq. Yeah, that's actually not the case. You don't have a reacceleration in manufacturing production. Copper prices reaching new highs. Silver prices reaching you. Right. X energy commodities are all hitting record high levels. That's some inflation pressure in the pipeline that's demand generated. Right. It's going to be very difficult for the Fed to totally ignore. Granted, like we said earlier, the consumer is not in the most fantastic of shape. The housing market is obviously saying that yet the consumer. But it's a mixed picture. Yeah. I mean, consumer sentiment was at its low on Friday when University of Michigan reported it. Consumer confidence came out this morning. I didn't see it. I don't know where it was a little bit better. It was a little bit a little bit better. But that's going to be an interesting play. We'll see how that we'll see how the second half. Let me tell you a little bit about that, because this is important. The Sentiment Survey, the University of Michigan Sentiment Survey is much more inflation centric. Yes. The Consumer Confidence Survey that comes from the conference board is more about financial conditions and growth prospects. Right. Employment prospects. Right. So the story being told, even in those surveys, is really interesting. Sentiment is reaching all time lows as inflation pressures are perceived to be budding and presenting a problem to consumers, whereas confidence is relatively resilient. It's not great. Right. But it's not at an all time low. Right. Because consumers perceive their financial conditions in the job market as generally OK. Right. Those are two very different stories. And that inflation versus growth story will play out in markets over the course of the second half of this year. The sentiment is going to take a big hit this summer. Yeah. And another sector to look at, ag, because there's going to be a heat dome over the central part of the United States. There's going to be all kinds of problems with... There's going to be a what, Olinson? A heat dome. A heat dome. It's what we're going to have. We already have drought. If you look at... So you can go to the U.S. Drought Monitor and you can follow this kind of stuff. If you're looking for where the herd is not looking. Right. And if you want to play soybeans, if you want to take a look at what's going on with ag products, we're about to get hit with higher beef prices. We're about to get hit with higher prices for food because... There's going to be a heat wave. We're going to have a heat wave, which is going to hurt farmers. It's going to hurt farmers. It's going to hurt the crop. So there's that issue. The other thing with affordability is housing. And even though it's gotten better, I was just reading this this morning, 2023, there was a metric which shows affordability for housing. And it's actually gotten a little bit better since 2023, but it's still unaffordable because most people are spending 40 percent, even with 10 percent down on to buy a house. They're still spending 40 percent of their pay. And rates are up. And rates are 6.35 now. I think it's closer, wasn't it? Closer to six and a half? Might be. Yeah, I thought it was closer to six and a half. Which, by the way, when I was a kid, people would have been thrilled. Don't even get me started. My first mortgage was 15 and a half percent. Yeah. Well, 20 years ago, rates were at six percent. But how much lower were house prices? So the affordability, affordability was a very different story. Yes. When the last time rates were. Yes, correct. And but I will say, and let's be honest, the reason we have a lot of this problem is because the Fed kept kept rates at zero for way too long, in my opinion, after the crisis in 2008, nine and ten. Right. It was fine. You keep you kept them low through maybe the mid teens, but they kept them way too low for way too long. And it caused this mismatch in asset prices, clearly housing. Certainly the stock market benefited as a result. Yeah. They used to have a policy at the Fed. I covered the Fed a billion years ago. And do they still do this? They there was a paper, I think it was 2008 when I read this, where they prefer to let an asset bubble deflate on itself. They don't want to let the pressure out. They want it to be a natural event. Are we in that kind of situation now? Because that's bad news. Yeah. If it means they want. Well, it's very interesting because Kevin Morse would argue that the Fed's sort of injection of quantitative easing into the economy via the balance sheet has what's created the financial asset bubble. And I agree with that rate policy targets sort of the American economy more directly. And so he wants to lean out of that to a degree, which maybe pushes back a little bit against that paper that says that they want to let bubbles deflate on their own asset bubbles, deflate on their own. If he's going to actually implement a more restrictive balance sheet policy or get the Fed out of a balance sheet as a tool for monetary policymaking, then that may help deflate the financial level. Think that what they really want is they want to inflate their way out of this problem. They don't really want inflation to go away. Do you think yes or not, Kevin Moore? No, I don't think Warshaws. I don't think so. I think we do have a problem with elevated debt per level of GDP. We do have a fiscal spending issue that he wants to get out of the game of supporting. Will he be able to do that or not? I'm not sure. That's going to be a really tricky, tricky conversation. They all said it every every time they go before Congress, they say spending has got to come under control and nothing happens. And it's not going to happen. No, it's not going to happen. So it's going to be as they as he does institute the balance sheet reduction. What happens to the U.S. dollar and to the fact that our government continues to spend? Are we at 40 trillion? We're about to hit 40 trillion in the total debt for the United States. And we're over 100 percent of GDP. And it's what happens to the consumer who wants to go get a mortgage? What happens if the consumer wants to buy a car? Right. When you're now competing against that. Have you, by the way, have you seen car prices and try to buy a car? Yes. No, they're not. Yeah, they start at seventy five thousand. And that's just sort of get it. Yeah, it's crazy. And let's get some final thoughts just on the second half of the year. You brought it up with midterm elections. So let's start with you in terms of what investors could expect. OK, so I am an optimist. I've always been an optimist. I think that we're going to see a decline in the S&P 500. And then after the election, I think you're going to see a shoot up. I think that the Iran war will get resolved. It may not get resolved. Well, Iran may control the Strait of Hormuz and start charging. But the flow of oil, the flow of fertilizers will resume at some point. So I think the fact that our economy is still in many ways the envy of the world will propel us higher toward the end of the year. I would agree. Bull market's still intact, probably a little ahead of our skis in particular with some of these growth stocks in the short run. But there are still the equal weighted index is not overvalued. Still sitting at valuation levels that we had pre-crisis. So there are opportunities in the equity market. You just have to pick your spots a little bit more carefully after the rip roaring rally that we had in a select segment of the market. Unfortunately, that segment is also representative of risk tolerance, historically, the semiconductors. So any pullback in that could be somewhat painful in the short run. Right. But I would suspect it's still within the scope of the longer term bull trend. Yeah, I agree. I do think the second half of the year is going to be fine. I think we're going to run into some summertime anxiousness around the midterm elections. I think the the war, the the conflict is going to be resolved. It's curious. I don't think they're going to maintain control of the Strait. I think that's going to be in international waters and they're not going to be able to charge. The problem, if that doesn't happen, the problem is everyone else can now say, well, we're going to control this one. That's why I don't think I don't think the world will let it happen in any event. Listen, we run out of time. I love this conversation. I'd like you to come back maybe four or five months and let's go back over this conversation and see where we are, what we thought, how we did in any event. I'm Kenny Polcari. And this is Trader Talk. And we'll see you next week. OK, thank you very much. Thank you. Pleasure. I enjoyed that. That was fun. I want to go ping Amy and find out. I want to ping Amy. I know. Are we are we off?